US in 'Currency Wars'? Bernanke Doesn't Think So

Currency Wars is the term coined by Brazilian finance minister Guido Mantega to describe what he saw as the dangerous ramifications of ultra-loose U.S. monetary policy. Mantega (and others) believe that the U.S. is debasing its currency, causing money to rush into emerging market currencies, threatening their ability to compete, and stoking inflation.

In a speech delivered at the IMF meeting in Japan, Bernanke took on this idea head on.

"In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," he said. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation."

The speech is short and sweet and makes a few key points, which we'll just bullet.

First of all, private money inflows into emerging markets are related to a lot of things, not just interest rate differentials.

Growth differentials also play a significant role, as research has shown.

What's more, these flows have diminished in recent years, despite ever-easier monetary policy.

Emerging markets have tools to deal with private money inflows. They're not helpless.

An economy that did not intervene would also benefit by the strengthening of domestic demand. Stronger currency = greater ability to buy imports.

Finally, there are real benefits to emerging markets from developed market easy policy. Most notably, the world benefits from U.S. easing if that U.S. easing stimulates activity and stokes import demand.

Bottom line: Things are a lot trickier than just saying that U.S. easy money screws emerging markets.